OREANDA-NEWS. UBS Group AG reported resilient profitability in 2Q16 in a difficult market environment as adjusted pre-tax profit rebounded from a weaker first quarter and increased slightly yoy, says Fitch Ratings. Revenue generation remained under pressure as client transaction volumes remained low. Performance in Asia Pacific was particularly affected as revenue declined by about a third yoy, and pre-tax profit generation in the region declined by about two-thirds. Capital ratios remained strong, and the group maintained a high liquidity buffer throughout the quarter.

UBS's 2Q16 adjusted pre-tax profit increased 2% yoy to CHF1.7bn, excluding CHF377m restructuring costs, CHF26m foreign currency translation losses and CHF220m net gains from the sale of assets. Adjusted operating revenue declined 4% yoy, driven by weak client transaction volumes. Continuing weak market conditions will make it difficult for UBS, as for most of its peers, to generate strong earnings for the remainder of the year. This highlights the importance of cost control for the group. UBS announced that it achieved CHF1.4bn of net cost savings as at end-2Q16 and confirmed its CHF2.1bn cost reduction target by end-2017.

UBS's Wealth Management division (WM) reported CHF606m 2Q16 adjusted pre-tax profit, down 21% yoy, as declines in transaction-based income and recurring fee income outweighed stronger net interest income. The division reported CHF6bn net new money (NNM) as strong inflows in Asia Pacific and Switzerland compensated for outflows elsewhere in Europe and emerging markets. Invested assets (AuM) increased qoq to CHF935bn, but a slight qoq increase in gross loans was the result of FX effects as client deleveraging resulted in outflows from Lombard lending. The net margin over AuM at 26bp remained relatively stable qoq, but fell 6bp compared with 2Q15.

Adjusted pre-tax profit in the Wealth Management Americas (WMA) business division saw good performance as adjusted pre-tax profit increased 28% to CHF275m, partly due to FX effects. In US dollar terms, net revenue remained broadly flat yoy as higher net interest income compensated for lower recurring and transaction-based income. WMA continued to see loan growth as gross loans increased 6% yoy in US dollar terms. AuM amounted to USD1,077bn at end-2Q16, up 3% yoy. UBS is working on improved collaboration between WMA and WM. This should result in better economies of scale for its US operations, which are smaller than those of its larger US peers. Greater emphasis on the retention of financial advisors and reduced investment in new recruitment should also help improve WMA's performance further.

The Asset Management business division saw improved adjusted pre-tax profit, which increased 10% yoy to CHF148m, mainly because of higher performance fees and a 2% decline in operating expenses. AuM declined 3% yoy to CHF633bn at end-2Q16, and NNM outflows amounted to CHF7.7bn in 2Q16.

Performance in the Personal & Corporate Banking (P&C) division was sound as adjusted pre-tax profit increased 12% yoy to CHF463m, the highest result since 4Q08. Revenue generation benefited from higher transaction-based income, and net interest income remained resilient despite pressure from low interest rates. P&C's net interest margin remained broadly stable at 165bp despite the interest rate environment as spreads on lending have held up well. Performance was also helped by a small credit loss recovery. We expect the division to generate resilient profit in the future, but net interest income is likely to come under pressure, and loan impairment charges could increase given the challenging environment for Switzerland's export-oriented corporates.

Adjusted pre-tax profit in the Investment Bank (IB) division improved sharply compared with 1Q16, but at CHF447m, was 28% below the 2Q15 result. The decline was driven by 19% lower revenues from the Corporate Client Solutions segment, which includes debt and equity capital markets, advisory and financing solutions. Revenue from foreign exchange, rates and credit improved 15% yoy, helped by market volatility. Income from equities fell 22% yoy, reflecting weaker performance, particularly in Asia Pacific and in equity derivatives. IB's pre-tax profit in Asia Pacific fell to below CHF50m in 2Q16, from CHF0.4bn in 2Q15, driven by a 50% revenue decline. UBS plans to continue strengthening its businesses in the Americas, where revenue pools have remained more stable, and IB in that region improved pre-tax profit to about CHF0.3bn in 2Q16 from CHF0.1bn in 2Q15.

UBS's capitalisation remains a strength, and its fully-applied CET1 ratio stood at 14.2% at end-2Q16, which is among the strongest in its peer group. The bank's Basel III fully-loaded Tier 1 leverage ratio stood at 4.2%, and we expect the ratio to improve further. UBS's liquidity coverage ratio (LCR) remained high at an average of 133% in 2Q16. The group's portfolio of high-quality liquid assets amounted to CHF220bn during the quarter as UBS prepared for liquidity requirements in its US intermediate holding company (IHC). We expect liquidity to remain strong, but the LCR is likely to be reduced once the group has strengthened its liquidity risk management systems following increased liquidity requirements for individual legal entities, including the US IHC.